NEW YORK/CALGARY (Reuters) - New U.S.
rules to toughen classification standards for oil-train shipments will
affect less than 3 percent of the tank cars now hauling crude across the
country, leaving older, flawed models on the tracks, officials and
industry sources say.

The emergency order released on Tuesday, a day ahead of a Senate
hearing on oil train safety, may affect some bitumen cargoes from
Canada, but will do nothing to curb the use of older DOT-111 cars
many hold responsible for a string of recent fiery accidents, they
said.

A train filled with crude oil from the Bakken region in North Dakota
exploded in the middle of the Canadian town of Lac Megantic last
July, killing 47. Since then, other derailments have caused huge
fires left to burn out over days as emergency crews look on,
fuelling a political backlash.

The U.S. Department of Transportation (DOT) order said that oil
carried by rail could no longer be classified as the least hazardous
type of flammable liquid, known as Packing Group 3, a measure it
said would improve emergency response and "require the use of a more
robust tank car."

Under the new U.S. order, all crude oil shipments must now be
labeled in Packing Group 1 or 2, the DOT said. The labels are
primarily used to help emergency responders understand the hazard of
the contents in the event of an accident; in most cases, changing
classification level involves simply relabeling a rail car.

But it can also affect which type of car is used. By prohibiting the
least-stringent Group 3 designation, shippers will no longer be
allowed to use tank car models AAR 203W or AAR 211W, according to a
DOT official. If it is classified as PG 1, the most hazardous type
of flammable liquid, it would also prohibit use of AAR 206W cars.

Those models, however, are scarcely used compared to the DOT-111,
the dominant car type whose specifications are authorized by the
Department of Transportation (DOT) rather than the industry's
Association of American Railroads (AAR).

There are currently only 1,100 AAR 211W cars transporting crude in
the United States, according to the AAR, less than 3 percent of the
crude oil tank car fleet. There are under 100 AAR 203Ws and AAR
206Ws still on U.S. rails, the AAR said.

That compares with the 94,000 DOT-111s used to transport crude and
other flammable liquids, according to data from the Railway Supply
Institute. It estimates that some 39,000 DOT-111s are being used to
carry crude, less than a third of which are built to a higher safety
standards in effect since 2011.

The banned cars "are estimated to be a small portion of the total
market of crude-by-rail shipments," said Divya Reddy, Director of
Global Energy & Natural Resources at Eurasia Group.

It is too early to say exactly how the order will affect oil
producers and shippers in the United States. The additional testing
may give regulators more data with which to draw up new rules that
could better target potentially dangerous cargoes, although such a
process could take months if not years.

"We expect the emergency order to further improve the safe movement
of crude by rail, in addition to all the other steps we are taking,"
said a DOT spokeswoman.

Other parts of this week's DOT order may have more impact for the
market, industry sources say. A new requirement to test all oil
cargoes for volatility prior to shipping has unsettled many
shippers, who question how frequently and exhaustively they must
test.

A NARROW IMPACT

Due to a surge in oil-by-rail shipments, which have risen from
nearly zero to some 1 million barrels per day (bpd) over the past
four years, tank cars are a scarce commodity, and even a small
reduction in number may constrain traffic.

The classification order may have the most impact for a handful of
companies that use the AAR-type cars for shipping Canada's heavy
bitumen crude, a tar-like substance that has none of Bakken oil's
explosive qualities and typically travels as PG 3, according to
industry officials.

Axeon Specialty Products, which leases about 1,200 tank cars to
transport heavy crude south from Canada to East Coast asphalt
plants, said it does use some AAR 211W tank cars, but it was as yet
unclear how much it would be impacted.

"Some of them are the AAR cars and that is why we are working with
the cars owners to determine what we can and cannot do," said Axeon
spokeswoman Claire Riggs. She was unable to say how many AAR 211
cars the company leased.

Axeon, owned by New York private equity firm Lindsay Goldberg, was
until this week known as NuStar Asphalt.

The three-tiered Packing
Group system is based primarily on the boiling and flash point of
the oil. More volatile light oil, such as the Bakken crude involved
in Lac Megantic, have lower boiling points and can ignite more
easily.

Still, the DOT order has done little to quell critics who say that
much tougher measures are needed to ensure the safety of mile-long
oil trains now rolling across America.

Meanwhile, the model DOT-111 tank cars that regulators acknowledge
need improvements, including pressure relief valves and reinforced
steel jackets to lessen the chance of puncture, spillage and
explosion during accidents, are still able to transport crude from
North Dakota and elsewhere.

The AAR has called for an aggressive phase out of DOT-111 cars built
before 2011 that do not meet current industry specifications. So
far, no rulings have been made on taking older DOT-111 cars off the
rails. The DOT is in the process of writing up new rules that are
expected next year.

CANADA FIRST

The U.S. order echoes a similar ruling by Canada in October, after
regulators cited the improper classification of a Bakken oil
shipment in the deadly Lac Megantic accident.

The October 17 order requires shippers to retest the classification
of their crude if the cargoes have not been tested since July 7, the
day after the Lac Megantic accident.

Any crude oil not retested is automatically classified as Packing
Group I, which indicates a degree of "great danger" in a product,
according to Transport Canada's website. Shippers whose oil cargoes
comply with PG 3 standards are still allowed to use that
classification, however.

"Proper classification and safety marks enables first responders to
take appropriate action following an incident," Adria Patzer,
communications officer at Transport Canada said.

A series of explosive, but not fatal, accidents have followed over
the past few months, tainting a trading boom that has allowed U.S.
shale and Canadian oil sands producers to reach new markets more
quickly than pipelines can be built.

Unlike the United States, Canada already had a requirement to
classify dangerous goods prior to transport.

The short-term impact of the ruling prompted a rise in the number of
crude cargoes being classified as PG I, the most risky category. But
shippers and rail terminal operators in Canada's oil capital Calgary
said that has had negligible impact on crude-by-rail operations
overall.

"The vast majority of cars through our site are fit for the new
regs, the few that aren't are being taken out of service," said Gary
Kubera, CEO of Canexus Corp, the operator of Western Canada's first
unit train terminal in Bruderheim, Alberta.

"We haven't seen any impact from this on throughput and I think it's
too early to know if any meaningful cost impact is occurring."

Canadian oil producer Cenovus Energy Inc said it had not experienced
any impact on its oil transportation operations as it was already
meeting safety requirements.